It’s tempting to think that Stock Trading strategies markets are a quick and sure way to get rich, but that’s just not the case. Stocks offer the opportunity to earn attractive investment returns, but they come with risks. Before launching an assault on the markets, it is crucial to properly assess the risks in relation to the potential return.
Before we get to the heart of the matter, which is how to make money in the stock market, let’s look at a simple question of such vital importance.
What is the Difference Between an Investor and a Speculator?
Before you start, ask yourself this question: am I an investor or a speculator? The distinction between these two terms is a big one and depends on your investment horizon.
Investors adopt a long-term strategy with respect to the growth of their investments in the stock markets.
They acquire shares and hold them for a long time, often for months, years and even decades. Investors are usually more risk averse than speculators.
Speculators, on the other hand, invest in the short term. They buy and sell securities daily or weekly in an attempt to take advantage of market fluctuations.
The well-known day trader buys and sells stocks several times a day, an exercise that often results in smaller but more frequent profits or losses.
How Do You Make Money in a Stock Market?
Time is the great ally of any serious investor. He relies on patience, seeking to grow his investments over a long period. He is a follower of long-term buying strategies.
He keeps his investments regardless of market conditions and owns stocks, mutual funds, bonds and other investment instruments.
To achieve his financial goals, an investor takes advantage of market capitalization and dividends to enhance the performance of his portfolio.
While investors don’t appreciate market fluctuations like everyone else, they know how to be patient in bearish periods, expecting an eventual rise in stock prices that will compensate for their losses.
Because they favor consistent long-term returns, investors pay close attention to price-earnings ratios, management forecasts and other fundamentals.
Investors are aware that their portfolios, as securities are traded, may gradually deviate from the objectives governing their investments. That’s why they regularly rebalance their investments to realign them with their financial goals.
In The Investor’s Toolbox: The Averaging Method
The cost-average method, or systematic approach to investing, meets the needs of long-term investors. Under this proven strategy, an investor makes periodic purchases in fixed amounts, usually on a weekly or monthly basis.
Since stock purchases span several market cycles, investors will sometimes pay more and sometimes less for the acquisition of a security. In the long term, this gradual approach smooths out the ups and downs of prices and limits their repercussions.
In The Investor’s Toolbox: Diversification
Another old investment success story, diversification, involves investing in a combination of investments in various asset classes in the hope that if one investment lags, others will pick up the slack by gaining the value.
The Speculator’s Ideology
The goal of any speculator is to generate higher returns than a long-term investor. It achieves its goals by frequently buying and selling stocks and other investment vehicles.
By following the old adage, “Buy low, sell high,” speculators generate profits by buying shares low and selling them higher relatively quickly, often on the same day.
Seasoned speculators are also adept at short selling. This strategy, which follows a logic that goes against the old adage mentioned above, predicts that a speculator will “sell high and buy low”, based on the idea that a transaction always ends up benefiting a party. or the other.
In such a maneuver, a speculator first borrows shares from a broker or investor and then resells them. Eventually, the speculator must return the borrowed securities, which he does by buying back the same securities on the market.
If the speculator buys back the shares at a price lower than their price when he borrowed them, he has managed to buy low and sell high (albeit in reverse order). The risk potential associated with this type of trading is high.
The Exit Strategy
Seasoned speculators spend as much time judging when to sell a stock as they do buying it, determining those times even before making a trade. The exit strategy is crucial because it allows you to generate profits while minimizing losses. Such a strategy revolves mainly around the following two points.
A stop order makes it possible to sell or buy a stock when it reaches a determined price and thus to limit in advance the losses that an investor is ready to incur, regardless of market fluctuations.
Limit Order (Or Take Profit):
Such an order defines a price at which an investor is ready to close a position and liquidate his investment in order to gain profits.
What Type of Speculator Are You?
A trader’s style depends on a number of factors, including their experience, the size of their portfolio, their tolerance for risk and, let’s face it, the time they are able to devote to studying the markets and to securities trading. Securities trading is a time-consuming activity. Usually, four speculator profiles are defined:
Scalping is a trading technique that aims to multiply small gains over dozens of daily transactions, with positions sometimes only being held for a few seconds!
A day trader seeks to multiply his daily trades in order to generate gains by taking advantage of market fluctuations.
Strategic speculators analyze and react to changes in company fundamentals. They tend to hold stocks for several days or even weeks, keeping an eye on price movements that would allow them to generate gains.
These speculators hold securities for weeks and months. They are not particularly active, sometimes trading only once a month.